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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri Rajesh Kumar & Shri SonjoySarma]
ORDER / आदेश Per Rajesh Kumar, AM: These are the appeals preferred by the assessee against the separate orders of the Ld. Commissioner of Income Tax (Appeals)-21, Kolkata (hereinafter referred to as the Ld. CIT(A)”] dated 23.11.2023 for the AY 2015-16 & 2016-17.
Since the common issue involved in these appeals, therefore these appeal clubbed together and heard together and being disposed off by common and consolidated order for the sake of brevity and conveyance. First of all we shall take up in AY 2015-16
Vide issue raised in ground no. 1, the assessee has challenged the order of Ld. CIT(A) upholding the reopening of assessment u/s 147 of the Act as made by the AO for examination of bogus purchases.
Facts in brief are that the assessee filed return of income on 25.09.2015 declaring total income of Rs. 25,20,300/- which was processed u/s 143(1) of the Act on 16.02.2016 accepting returned income. Thereafter the case of the assessee was reopened u/s 147 of the Act after the AO received information that the assessee has routed its unaccounted money into the books through bogus bill in the form of bogus purchases after obtaining approval from the competent authority and has accordingly issued notice u/s 148 of the Act on 13.03.2019 to the assessee which was duly served upon the assessee. The assessee complied with the said notice by filing return of income on 20.04.2019 declaring total income of Rs. 25,20,300/-. Thereafter the statutory notices were duly issued and served on the assessee. The impugned reopening was made after the AO received information qua assessee as found by the search team during search operation conducted in the case of ‘Saraogi Group’ on 15.12.2015. The group companies including the assessee M/s Saroj Embrods Pvt. Ltd. have made purchases of sarees from various concerns like Shree Krishna Fashion, Ridhi Sidhi Creation, Bhutnath Enterprise, Shree Baishno Enterprise and Drawer Tradecom Pvt. Ltd. which were fictitious and non-existent and the assessee has made purchases to the tune of Rs 3.06 Crore which appear to be bogus as the existence of supplier companies were doubtful. Finally the AO, after examination of bills, vouchers, details of payment filed by the assessee in support of its purchases, treated the purchasesto the tune of Rs. 3.06 crore from these concerns/companies as bogus and added back the same u/s 69 of the Act on account of unexplained expenditure which was claimed by the assessee in the form of purchases in the assessment framed u/s 143(3)/147 of the Act vide order dated 29.12.2019.
3 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. 5. In the appellate proceedings, the assessee challenged the order of AO both on legal issue as well as on merit however the Ld. CIT(A) dismissed the appeal of the assessee on legal as well as on merit. While dismissing the appeal on legal issue the Ld. CIT(A) has not given any finding and simply affirmed the reopening of assessment.
The Ld. A.R vehemently submitted before us that the reopening of assessment has been made by AO just to examine the so-called bogus purchases made by the assessee from five entities which according to AO were non-existent. The A.R, while referring to the reasons recorded u/s 148 of the Act, submitted before the Bench that in para 1 of the reasons, the AO has discussed the factum of search on Saraogi Group and also the fact that the assessee company was a group company and the assessee company had made purchases from non-existent suppliers and in the second para the AO noted that one of the concerns out of suppliers entities as noted in para 1 M/s Ridhi Sidhi Creation did not exist. At page no.2 para 1 theAO noted that the assessee has routed its unaccounted money into the books books by taking bills in the form of bogus purchases and considering these facts the AO noted that unaccounted money/income through bogus purchases required to be examined and in pare 2 page 2 the AO has noted that the income has, to that extent, escaped assessment in the hands of the assessee. The Ld. A.R argued that the reopening of assessment u/s 147 read with Section 148 of the Act cannot be made just for the purpose of examination or verification of the facts as the AO is required to record the reasons u/s 148(2) and reach an objective satisfaction as to how the income has escaped assessment. The Ld. A.R submitted that in the present case the AO has simply noted it was found that the assessee was found to be indulged in the bogus purchases from the five concerns as mentioned in the reasons recorded which needs to be examined. The Ld. A.R therefore prayed that the AO is himself not sure whether the income had escaped or not. The Ld. A.R argued the provisions of Section 148 of the Act which deals with the reopening which unsettle the already settled assessment and therefore the reasons recorded stated only that the bogus purchases were required to be examined.The Ld.
4 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. A.R. contended that the AO is required to form a belief on the basis of said information received that income of the assessee has escaped assessment failing which the AO has no jurisdiction to initiate the proceedings under section 147 read with section 148 of the Act. The Ld. A.R. argued that the AO is required to form a reasonable belief that that income chargeable to tax has escaped assessment on the basis of information available to him which is missing in the instant case as is apparent from the reasons reproduced above. The AO has resorted to the provisions of section 147 of the Act to merely verify the bogus purchases and therefore the notice issued under section 148 for verification of information received is invalid and unsustainable in the eyes of law. The Ld. A.R. argued that AO can not be allowed to reopen an assessment under section 147 of the Act to undertake fishing or robbing enquiry or to seeking to verify claims as if it were a scrutiny assessment. Therefore, the Ld. A.R. submitted that if verification is proposed in the reasons recorded, the same can not be a substitute for reason to believe which empowers the AO to reopen the assessment on the ground that income chargeable to tax has escaped assessment. The Ld. A.R. therefore, argued before the Bench that there is no formation of belief or finding by the AO that income has escaped assessment and therefore the assessment proceedings as well as the consequent assessment order are bad in law and may kindly be quashed. The Ld. A.R submitted that the reopening of assessment u/s 147 read with 148 of the Act is therefore bad in law and may kindly be quashed. In defense of argument the Ld. A.R relied on the following decisions:
PCIT v ManzilDineshkumar Shah (406 ITR 326)(Guj) 2. SLP dismissed by the Hon'ble Supreme Court against the judgment of the Hon'ble Gujrat High Court in the case of PCIT v Manzil Dinesh kumar Shah 3. Inductotheran (India) P. Ltd. v DCIT (356 ITR 481)(Guj) 4. Chhugamal Rajpal v S P Chaliha and Ors. Ltd. (416 ITR 435)(SC) 5. Nivi Trading Ltd v Union of India (375 ITR 308)(Bom)
The Ld. A.R., therefore, prayed that in view of the ratio laid down by the Apex Court and various High Courts, the assumption of jurisdiction under section 147 of the Act for verification and examination of purchases is bad in law and so is the consequent assessment framed u/s 143(3) r.w.s. 147 of the Act. Accordingly, the Ld. A.R. prayed that the same may kindly be quashed.
The Ld. D.R., on the other hand, strongly opposed the arguments putforth by the Ld. A.R. by submitting that in this case the information to the effect that the assessee has made bogus purchases and based upon the said information the reasons to believe were recorded and after obtaining approval from competent authority ,the case was re-opened u/s 147 of the Act and notice under section 148 of the Act was issued. The Ld. D.R. argued that in this case the AO has tangible and fresh material to form a belief that income has escaped assessment. The Ld. D.R., while referring to the reasons recorded, submitted that it is clearly mentioned in the reasons recorded under section 148(2) of the Act that purchases were bogus. The Ld. D.R., therefore, prayed that the ground raised by the assessee before ldCIT(A) has rightly been dismissed by the first appellate authority after going into the legal aspect of the issue. The ld. DR prayed that in view of these facts and circumstances especially independent and tangible materials, the legal ground raised by the assessee may kindly be dismissed by upholding the order of Ld. CIT(A) on this issue.
We have heard the rival submissions of both the parties and perused the material on record including the impugned order and the reasons recorded under section 148(2) of the Act for reopening the assessment. We note that in this case the assessee has made purchases from 5 concerns which were stated to be bogus. The AO has recorded the reasons as required u/s 148(2) of the Act to reopen the assessment and recorded in the concluding para of the these bogus purchases were required to be 6 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. examined. For the sake of convenience and ready reference the said para is extracted again as under: “From the facts above, it is patently clear that SarojEmbrods Pvt. Ltd. is engaged in routing unaccounted money through raising bogus billing in the form of bogus purchase. Considering the above, I am convinced that the assessee has routing its unaccounted income/money through bogus purchase which required to be examined. Hence, judging the facts and circumstances of the case stated abridgely above. I have reason to believe that a sum of Rs. 3,06,00,000/- has escaped assessment in the hand of the assessee for A.Y. 2015-16 and therefore the case stands merit for reopening of assessment. Accordingly, the notice u/s 148 of the I.T. Act, 1961 is required to be issued to initiate the proceeding us. 147 of the I.T. Act, 1961 if approved.”
Thus we note that the AO has mentioned in the reasons recorded that the facts and information as regards bogus purchases were to be examined and in view of the said fact he has reason to believe that income chargeable to tax has escaped assessment and accordingly reopened the assessment under section 147 of the Act. We find merit in the contentions and arguments of the Ld. A.R. that the AO has not formed any independent belief or recorded a finding that income of the assessee has escaped assessment but merely stated in the reason to believe that these facts and information need examination and hence reopened the case in order to carry out the verification of these facts which are not permissible under the Act. The case of the assessee is squarely covered by a series of decisions as referred to during the hearing by the ld counsel of the assessee and are discussed hereunder: (a) In the case of PCIT vs Manzil Dinesh kumar Shah (supra), the Hon’bleGujrat High Court has held that formation of independent opinion by the AO is mandatory condition and mere mentioning of need for deep verification of information received is not a valid ground for reopening. The Hon'ble court has held that reopening of assessment could not be permitted for fishing or robbing enquiry as it would not satisfy the requirement of the AO having reasons to believe that income chargeable to tax has escaped assessment. In this case, the AO has recorded that I have reason to believe that income chargeable to tax has escaped assessment for the assessment year 2009-10 due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and thus the case needs to be 7 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. reopened as the information received by this office needs deep verification. The Hon’ble Court has held that had the AO on the basis of information made available to him and upon applying his mind to such information formed a belief that income chargeable to tax has escaped assessment, the court would have rightly allowed him to reassess the income but in the present case he recorded that information required deep verification and later reconstitution of mandatory words that he believed that income chargeable to tax has escaped assessment would not cure this fundamental defect. The Hon’ble Supreme Court has dismissed the special leave petition filed by the Revenue in the above case as reported in (2019) 101 taxmann.com 259 (SC) wherein thereby upholding the view taken by the Hon’ble Gujarat High Court in the above case.
(b) In the case of Inductotheran (India) P. Ltd. v DCIT (supra) the Hon’ble Gujarat High Court has held that the reassessment notice is not permissible merely for verification of claim made under section 80HHC of the Act. The relevant extract of the decision of the Hon’ble Gujarat High Court is reproduced below: “18. Reverting to the facts of the present case, we notice that in two out of the four reasons recorded by the Assessing Officer for reopening the assessment, he stated that he need to verify the claims. In the second ground, he had recorded that the admissibility of the bad debts written off required to be verified. In the fourth ground also, he had recorded that the admissibility of royalty claim was required to be verified. We are in agreement with the contention of the counsel for the petitioner that for a mere] verification of the claim, the power for reopening of assessment could not be exercised. The Assessing Officer in the guise of power to reopen ai assessment, cannot seek to undertake a fishing or roving inquiry and see] to verify the claims as if it were a scrutiny assessment.” (c) In the case of Chhugamal Rajpal v S P Chaliha and Ors. Ltd. (supra), the Hon’ble Supreme Court has held that the AO must have prima facie grounds for issuing notice u/s 148. The operative part is reproduced as under: “Held, (i) that the Income-tax Officer had not even come to a prima fade conclusion that the loan transactions to which he referred were not genuine transactions : he appeared to have only a vague feeling that they might be bogus transactions. Such a conclusion did not fulfil the requirements of section 151(2). Under that section he had to give reasons for issuing a notice under section 148. He should have some prima facie grounds before him for taking action under section 148. His conclusion that there was a case for investigating the truth of the alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The Commissioner had mechanically accorded permission. The important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Income-tax Officer could not have had reason to believe that income had escaped assessment by reason of the appellant-firm's failure to disclose material facts and if 8 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore invalid.”
Thus the court observed that AO has recorded in his report that there is a case for investigation as to the truth of the alleged bogus transactions and court held that this does not meet the requirements to issue notice under section 148 of the Act.
(d) In the case of Nivi Trading Ltd v Union of India (supra) & others (supra) the Hon’ble Bombay High Court has held that if more details are sought or some verification is proposed that can not be a substitution for reason which led the AO to believe that income chargeable to tax has escaped assessment. The court has held as under: “Held, allowing the petition, that the return of income was filed. There was a processing and verification thereof. In the return of income and on the respondents' own showing on its verification, the long-term capital gains and dividend income in the sum came to be disclosed and equally another sum (Rs. 1,21,33,429) as gift. The Revenue proceeded on the footing that these shares were gifted without consideration. It was this fact which it wanted to verify and particularly whether the value of these shares had been computed on the market value. The tax authorities did not state that any income chargeable to tax had escaped assessment: All that the Revenue desired was verification of certain details and pertaining to the gift. That was not founded on the belief that any income which was chargeable to tax had escaped assessment and, hence, such verification was necessary. That belief was not recorded. The notice of reassessment was not valid.”
(e) In the case of CIT v ManibenLalji Shah (supra) the Hon’ble Bombay High Court has held that the reopening of assessment under section 147 to scrutinize the investment made in the flat purchased is not valid as the AO only seeks to find out the source of funds and same does not constitute any reason for belief that income has escaped assessment so as to invoke section 148 of the Act and accordingly the appeal of the Revenue was dismissed.
(f) In the case of CIT v Batra Bhatia Company (supra) the Hon’ble Delhi High Court has held while dismissing the appeal of the Revenue that Ld. CIT(A) as well as Tribunal had given a concurrent finding that there was no material before the AO on the basis of which the AO would have had a belief that agricultural land sold by the assessee was a capital receipt within the meaning of section 2(14) of the Act and 9 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. expression of the AO “requires much deeper scrutiny” indicated that he was mere embarking on mere presumptions without any belief much less belief based on reason and material and thus the reassessment was not valid.
In view of the ratio laid down in the various decisions as discussed above vis a vis facts of the assessee case, we are of the considered view that the AO has not formed a prima facie and independent belief on the reasons recorded that income has escaped assessment but reopened the assessment only for carrying out examination of purchases made by the assessee. Under these facts and circumstances, we are not in a position to concur with the finding of the Ld. CIT(A) justifying the re-opening of assessment. Under these facts and circumstances, the order of Ld. CIT(A) is required to be set aside on the jurisdictional issue and the reassessment proceedings are held to be invalid and so is the assessment framed under section 143(3) read with section 147 of the Act. The legal ground raised by the assessee is allowed.
Issue raised in ground no. 2,3& 4 are not merit and against the order of Ld. CIT(A) confirming the addition as made by AO.
Facts in brief are that the assessee made purchases from these concerns during the year which was duly supported with the bills, vouchers, stock register and payment through banking channel etc. The AO added entire purchases to the income of the assessee by disregarding the facts on records and evidences before him without rejecting the books of account.
In the appellate proceedings, the Ld. CIT(A) partly allowed the appeal of the assessee by observing and holding as under:
“Having considered all the facts, I find that the information sent by Investigation wing was not examined and cross verified by the Ld AO. Even no material has been brought on record of assessment order to show that purchase bills were bogus. I find that the Ld AO, without bringing any documentary evidence on records in assessment order, has simply made the addition on the basis of the communication from Investigation Wing. In my opinion, before the AO decides to make the addition, he has to satisfy himself, bring material on record, to show that purchases were bogus. The information from Investigation Wing may give trigger to the AO to verify the genuineness of the transaction. However, it is the AO who has to conduct proper enquiries to verify the correctness and validity of the said information, before 10 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. proceeding with making an addition. No adverse material has been brought on record to justify that addition. Further, there is no whisper in the entire order that the assessee failed to prove the genuineness of Bills and Payments. In my view, therefore, the addition is not maintainable, observing the assessment order. The assessment records indicates, however, that the only reason for not accepting purchase expenditure of Rs.3,06.00,000/-, that guided the AO, was that information received from the Investigation Wing. There clearly was no reason before the AO - as the assessment records indicate - for not accepting the purchase expenditure, that emanated from any of his enquiries. In fact, the AO, as already discussed earlier, has not pointed out any defects/deficiencies in the results of his enquiries in support of the entire purchases. Further, it is noticed that, in the Assessment Proceedings of the Appellant for the A.Y. 2016- 17, on similar issue, the AO has accepted the purchase from M/s RidhiSidhi Creations, which is one of the companies with whom the purchase transaction wasmade in the A.Y. under consideration i.e. A.Y. 2015-16. It doesn’t seem rational and logical that in one Assessment Year purchase from the same company is accepted and in another assessment year, purchase from the same company is not accepted In view of a complete absence of any reason before the AO, in the form of any evidence, the said addition of whole purchase expenditure of Rs. 3,06,00,000/- can hardly be legally accepted which does not seem to be based upon any forms of evidence or reasoning. Accordingly, when the Assessing Officer has not carried out any exercise to determine this addition. A report without any evidence in its support, that too without giving the appellant an opportunity to at least address this proposal to take whole purchase expenditure for the impugned transactions, would not ipso facto result in an addition to the income declared by assessee. In view of the above discussions, in my opinion, addition of whole purchase is not justified, however, the G.P. rate declared by the appellant in the year -A.Y. 2015-16- would serve as a fair and reasonable that could be assumed in the case of transactions that were being considered doubtful by the AO. This G.P. rate has been accepted and, therefore, could serve as a reasonable guide for estimating the profits from the impugned transactions. Accordingly, applying the G.P. rate of 18.13% to these transactions, the addition is restricted to 18.13% of the transaction amount of Rs.3,06,00,000/-. This ground is, therefore, partly allowed.”
After hearing the rival contentions and perusing the material on record, we find that the assessee has made purchase from five concerns aggregating to Rs. 3.06 crores which are duly supported with the bills, vouchers, challans, stock register, payment, through banking channel. The AO without rejecting the books of account added entire amount of bogus purchases of Rs. 3.06 crores to the income of the assessee on the basis of finding of search team without conducting the any enquiry or investigation into the evidences filed by the assessee. Pertinent to note that while making the addition , the AO stated in the last page i.e. no. 3 of the assessment order in para 2 that the assessee could not substantiate the evidences of these sundry creditors namely Shree Krishna Fashion, Ridhi Sidhi Creation, Bhutnath Enterprise, Shree Baishno Enterprise and Drawer Tradecom Pvt. Ltd. which were totally doubtful and added
11 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. back the purchases made u/s 69C of the Act as unexplained expenditure. In our opinion, the said view of the AO is full of infirmities and flaws. We note that the provisions of section 69C deals with the unexplained expenditure which are not recorded in the books of account and the assessee did not offer any explanation about the source of such expenditure, but in the instant case the purchases were duly recorded in the books of accounts and source of money utilized for making payments to these creditors were not in doubt and was fully recorded and explained. Therefore in our opinion, the addition has been made by AO under the wrong provisions of Act which shows the complete absence of application of mind on the part of the AO. So far as the appellate authority is concerned the Ld.CIT(A) applied gross profit on the said purchases. We also note that even the notices were issued u/s 133(6) of the Act which were duly served but not responded by the parties. The Ld.CIT(A) did not deal with the issue as to how the additions made u/s 69C of the Act is correct. In our opinion, very addition was made under wrong provisions of law i.e. 69C. The Ld.CIT(A) could not justify the application of GP rate on the said purchase which stood fully disclosed in the books of account of the assessee and offered to tax disclosed by the assessee. Moreover there was no rejection of books of account by both the authorities below. The case of the assessee finds support from the decision of Hon’ble Calcutta High Court in the case of Diagnostics vs. CIT &Anr. In [2011] 334 ITR 111 (Cal) wherein the Hon’ble High Court has held as under:
“ii) That however as regards the payments made to SP amounting to Rs. 3,12,302/-, those had been made by account payee cheques and those had been encashed through the bankers. The amount could not be added to the income of the assessee. If an assessee took care to purchase materials for his business by means of account payee cheque payments from a third party and subsequently, three years after the purchase, the third party did not appear before the Assessing Officer pursuant to the notice or even had stopped business, the claim of the assessee on that account could not be discarded as non-existent.” Considering the facts of the case, we are inclined to set aside the order of Ld. CIT(A) even on merit by directing the AO to delete the addition. Accordingly the grounds raised by the assessee is allowed.
12 & 1352/Kol/2023 Assessment Years: 2015-16 & 2016-17 Saroj Embrods Pvt. Ltd. 16. Since the issue raised before us in this appeal is similar to one as decided by us in wherein we have allowed the grounds raised by the assessee .Accordingly, in the present case also the facts are quite similar and would, mutatis mutandis, apply to this appeal as well. Consequently the appeal of the assessee is allowed.
In the result, both the appeals of the assessee are allowed.
Order is pronounced in the open court on 20th May, 2024